Correspondent Banking-Related Risks Arising from Cartels’ Designations as Terrorist Organizations

• On January 20, 2025, President Trump issued an executive order directing evaluation of cartels and other transnational criminal organizations (“TCOs”) for designation as Foreign Terrorist Organizations (“FTOs”) or “Specially Designated Global Terrorists” (“SDGTs”). On February 20, 2025, the U.S. Department of State designated eight TCOs as both FTOs and SDGTs.[1]
• These designations introduce increased civil and criminal liability risks for companies. Because the TCOs operate primarily in Latin America, U.S. banks may perceive increased legal exposure from Latin American banks’ correspondent activity.
• In addition, as the United States devotes new law enforcement resources to TCO-related concerns, U.S. correspondent accounts may also subject Latin American banks to subpoenas and other law enforcement scrutiny. U.S. law enforcement can use banks’ correspondent accounts as a vehicle to subpoena records – including foreign bank records unrelated to correspondent account activity.
• Latin American banks may consider evaluating their anti-money laundering and countering the financing of terrorism (“AML/CFT”) processes and augmenting them as needed. Enhancements could include more focused risks assessments and monitoring efforts, as well as refreshing documentation of control frameworks.

U.S. Banks May Restrict Correspondent Banking Access or Impose Additional Diligence Obligations or Controls.

• Major U.S. dollar clearing banks may view providing correspondent banking services to Latin American banks – particularly those with extensive operations in Mexico, Central America, Colombia, Ecuador, and Peru – as presenting new and additional risks.
• TCO-related risks, including risks specific to U.S. correspondent banking activity, are not new. Banks understand that funds flowing through their correspondent bank accounts may expose them and their correspondent banks to liability under U.S. sanctions and AML/CFT laws. Before the February FTO and SDGT designations, all but one of the designated TCOs had already been the subject of U.S. sanctions because of their drug trafficking activities,[2] and Latin American banks had associated control frameworks in place.
• The FTO and SDGT designations enhance prior risks, however, in part because they signal the U.S. government’s enforcement priorities and renewed enforcement focus on TCOs. In addition, criminal “material support” laws present a new and potentially broader set of prohibitions than U.S. sanctions, and FTO designations may provide a predicate under the U.S. Antiterrorism Act (“ATA”) for additional lawsuits.[3]
• Correspondent banks have responded to heightened risks in the past by “de-risking,” or choosing to terminate correspondent account relationships with foreign financial institutions that operate in high-risk jurisdictions or have high-risk customer activity. In the 2010s, Latin American banks, in particular, experienced precipitous drops in correspondent account activity.[4]
  • The FTO and SDGT designations may again put Latin American banks in the de-risking spotlight, if U.S. correspondent banks perceive that the terrorist financing risks, and associated compliance costs, are too high. U.S. banks may also seek to impose restrictions or controls on Latin American banks’ correspondent account activity to reduce risks.
• At minimum, Latin American banks should expect their U.S. correspondent banks to apply increased diligence measures. These measures may involve enhanced scrutiny of correspondent account holders’ control infrastructure and customers, particularly if those customers are themselves foreign banks.[5]

Law Enforcement May Issue Subpoenas or Take Other Actions Based on U.S. Dollar Correspondent Accounts or Account Activity.

• U.S. and foreign banks should anticipate that the U.S. Department of Justice, FinCEN, and bank regulators may prioritize AML/CFT enforcement efforts on transactions that have connections to TCOs and related national security risks.
  • ln prior administrations, DOJ has been willing to charge foreign banks without any U.S. presence with conspiracy to commit money laundering under U.S. law, when those banks have facilitated suspicious transactions by their clients, and the transactions involved or passed through the United States.
• U.S. law enforcement can use foreign banks’ correspondent accounts as a vehicle to obtain investigation information.
  • Law enforcement and FinCEN can subpoena records related to not only cross-border payments, trade finance, or other correspondent activities, but also “any account at the foreign bank, including records maintained outside the United States.”[6]
  • Foreign secrecy or confidentiality laws, by themselves, are insufficient bases to quash or modify the subpoena.[7]

Practical Steps Banks Can Take to Reduce Risks.

• As noted, Latin American banks are attuned to the existing risks of interacting with the designated cartels and TCOs more generally, including the risk of primary and secondary sanctions enforcement, and existing controls already in place may mitigate some of the new risks associated with FTO and SDGT designations.
• Banks may seek to evaluate and augment these controls, where needed, to ensure they are commensurate with the current risk environment. Measures may include:
  • Enhancing risk assessments and KYC activities for customers and counterparties to (a) look for potential ties in high cartel-risk sectors and geographies, and (b) ensure an understanding of the nature and purpose of cross-border funds flows that may run through U.S. correspondent accounts;
  • Calibrating existing transaction monitoring practices, and monitoring scenarios, to ensure they recognize atypical or unexpected activity; and
  • Assessing alert and case resolution processes to confirm that they take account of client-specific information collected during the customer due diligence process.

Banks should also be prepared to have discussions with their U.S. correspondent banks regarding their control environments and for additional inquiries related to their correspondent bank activity. In this regard, it may be prudent to renew documentation around compliance practices, to ensure documentation appropriately captures the full set of controls employed, can be easily understood by correspondent banks, and is ready for review by correspondent banks and U.S. law enforcements should that become necessary.

This client alert was authored by Meghann Donahue and Nikhil Gore. If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services, White Collar Defense and Investigations, and Sanctions practices.